Why I Think Summerset Is A Buy Right Now

There are no surprises in Summerset’s FY20 announcement, with Underlying NPAT being almost exactly on guidance (released Dec 2020), though truthfully I was hoping for a bumper result due to record sales being published a month after the guidance was announced.

Not a very exiting result, but not bad when you consider that no sales could be made during the lockdown. Also, it’s been nice to see total NPAT increase by 32% against FY19, the difference of which being that total NPAT considers increase in value from property revaluations.

With a market cap of $2,876m against FY Underlying NPAT of $98.3m, excluding cash in the bank, that puts SUM on a ratio of just under 30. This is expensive based on Underlying earnings, or cheap based on NPAT. So depending on your reason for purchasing, SUM could be viewed as expensive or cheap; but here’s the crux: even if you’re investing based on the value of return in underlying value (i.e. not investing based on increasing NTA), NTA has an effect on NPAT: as property prices go up, customers must pay more to buy in, which means more profit. Additionally, as property prices go up, it becomes more favourable for potential customers to unlock the value in their homes and move into a Summerset property.

So what’s peaked my interest in Summerset recently? Well, because of my job I have a unique insight into the property sales data in a way that isn’t available to most. I was recently stunned by the latest sales data while I was investigating what I thought was a gross inaccuracy in some property price estimation software using this data. It seems that property prices are going wild, and my own home looks like it’s increased by 20%-30% within the last 2 months. I’ve not done a fully analysis, but I’ve looked at enough data to see that prices are going crazy.

Given that SUM’s share price doesn’t seem to have fully factored this in (based on a lack of change in the past 2 months), I think that SUM are a great buy right now for anyone with a longer term outlook (at least a year). Based on Underlying NPAT, a PE of less than 30 would require a return of +20% on next year’s earnings. Looking at Summerset’s prior performance and current state of the residential housing market, I think this is entirely possible. Even though risks from changes to the LVR scheduled in March could impact this, I feel comforted by the extended period of low interest rates which (as any property investor will tell you) makes property investment hum.


Why I Think Summerset Is A Great Buy Right Now

The most recent stats on CPI (Consumer Price Inflation) are pretty flat, which to me suggests that we are looking at another drop in the OCR (Official Cash Rate). This means cheaper mortgages, which means more demand for property. The increased demand will push prices up, causing property investors to be in a better position to buy more property with equity in their existing property portfolio. This will create more demand, and push prices higher.

This will help companies that benefit from high property prices, which includes retirement villages as older folks feel that a buoyant housing market is a good time to sell – giving them more money to move into a retirement home. Of course the flip side of that, is that retirement home prices go up as the value of property goes up, so I believe they stand to benefit from increased demand (sales) and price.

I think Summerset (NZX:SUM) is a great buy right now because they have a massive land bank, build a lot of property each year, and their properties are good quality. The main concern investors seems to have is the growing number of unsold units each year, though Q3 sales stats may abate a lot of this concern, making Summerset my clear preference.

I think Ryman Healthcare (NZX:RYM) could be a better buy in some ways, because with the risk of rising prices and the economic (and general) volatility at the moment, older people may be attracted to Ryman’s fixed fee’s for life offering. Though I’m a little put off Ryman since reports of problems with the built quality of their buildings, which could bring costs and problems for the company later down the line. Additionally, they have a greater presence outside NZ, which carries its own risk to their clientele.


Summerset Bond Issue

NZX listed retirement village, Summerset (SUM) has recently issued a bond offer. This seems largely unpopular with the ShareTrader community, but I thought I’d offer my thoughts on the matter.

Bonds are debt issued by a company (or government), which are a little bit special. This is because bondholders have priority over shareholders and (I believe) other creditors in getting their money back in the event of liquidation. In exchange for this reduced risk, investors are willing to accept a lower ROI, making bonds the cheapest type of debt a company can get.

Given the level of uncertainty in the economy, investors will likely appreciate bonds with yields greater than 2%, and backed by real estate. In other words, demand during the book build should be strong, which will mean SUM’s bond issue will likely be subscribed to the full value and at the lowest rate.

In summary SUM is about to take on a load of cheap debt, but is this a good thing? Commenters on ShareTrader seem to be unhappy with the increased debt at the time of writing this. While I would agree that increased debt for a business (especially during a recession) is generally a bad thing, personally, I think this bond issue is a good thing.

When investing in real estate, more debt equals more profit. So if one can acquire a load of super cheap debt, then that can propel the business forward. Therefore long term, I see this as a good thing.

My only concern is that sales are able to keep up with development of new units.


Summerset (NZX:SUM) Sales Performance Investigation

There is a massive amount of research to do into retirement villages, as an investor and truthfully I find retirement villages a little mind boggling; not only do they adopt fairly complex business models, but there are so many different ways you can view the investment proposition.

I knew that I wanted to invest in a retirement village for the property exposure because aside from the large 4 bed home (which is ample for a single guy in his 30’s) I no longer have any exposure to property investment since divesting my rental properties a few years ago, but need to do more research before committing more than the few thousand bucks worth of shares I bought a couple of weeks ago.

I had a quick look into OCA and a chat with one of their finance employees a few years ago and decided that wasn’t for me, RYM seems expensive (though I need to do more research to confirm if any investment proposition reveals value there), and ARV’s share price had been going sideways for long enough for me to be disinterested in putting in the time to analyse the stock. I also have some background knowledge in SUM because I was a shareholder a few years back. I also like that they’re brick-and-tile buildings, and more of a property investment than some others (in my opinion).

Looking At Sales Performance

I recall reading on that a number of people seemed to be unhappy with the “growing stock” of new retirement units being delivered (which is industry lingo for “built”) but not sold. I wanted to allay such concerns in my purchase, which I have done based on stats from past and current annual reports. Specifically, I am largely happy that:

  • Despite the drop off in sales of new units, the percentage of new units that are unsold against the units delivered each year is not too bad. I would expect that a certain amount of free stock needs to be held so it can be demonstrated during the sales process. I would also expect that unsold stock would appear on the annual results presentation if a retirement complex had just been built and not yet available to sell (as I recall being suggested in one of the annual reports). This point is quite a matter of faith, but less so when considering the two bullet points that follow this one.
  • Despite some shenanigans from COVID19, Underlying Profit is still positive.
  • Profit from new builds continues to be positive.
  • They’re looking to be paying in line with the top payers of the industry for staff. I think this is a good thing given the increased difficulty getting nursing staff after immigration law changes. Also (anecdotally) I recall reading a comment from Couta (who is respected on the forum as being the man on the inside for retirement village stocks – though I don’t know to what level he is “inside”) on that many Summerset sales staff left to work for Ryman.

It is my hope that with increased fiscal stimuli from the government, including lower interest rates, we will see inflationary pressures in NZ that will help house prices, effectively reduce debt and make it easier for people to move into retirement villages.

Please find my limited, incomplete research numbers in the table below. I share this with you as it took some time to gather. Perhaps you might like to fill in the blanks in the comments below this article, to help others.

YearUnits Delivered (Built)New SalesResalesUnsoldTotal Number Of UnitsDevelopment Margin % (% Profit on new builds)Profit from new builds
Profit from new builds is estimated to be in the region of $43m to $55m for the year 2020

At the end of the most recent period, 266 resale units where unoccupied, which is 6.5% of the total number of units. This does not include the number of unoccupied new units. This number would have been heavily influenced by the COVID19 lockdown.

Probably more time needs to be spent analysing this share from different perspectives to try to understand how the market prices this stock. For example, what emphasis is put on the NTA vs Underlying Earnings? Understanding this would help ensure a better entry point to this stock, and make me more comfortable with the investment proposition on which I have bought and will buy in the future.


Summerset Group Holdings Ltd (NZX:SUM & ASX:SNZ)

Summerset Dividend growth chart